Case 1

1. a. Variable Costs Per Unit:

Direct Materials 105,000 Direct labor

91,000 Supplies used 36,000
Total 232,000
Divided by Units 200,000
Cost per Unit 1.16

b. Direct Fixed Cost Per Unit

Depreciation on pie department equipment 32,000

Divided by Units 200,000
Cost per Unit 0.16

c. Allocated Costs Per Unit

Utilities, insurance and taxes 52,000

Rent 48,000
Total 100,000
Divided by Units 200,000 Cost per Unit 0.50

2. a. What is the variable contribution margin per pie? Ratio?

Total Per Pie

Sales (200,000 units) 580,000 2.90

Less: Variable Expenses
Direct Materials 105,000
Direct labor 91,000
Supplies used 36,000
Total Variable Expenses 232,000

Contribution Margin 348,000

Contribution Margin Ratio 60%

b. What is the direct contribution margin?

c. What is the gross margin from selling pies?

Sales (200,000x2.90) 580,000 Less: Cost of Goods Sold Direct

Materials 105,000 Direct Labor 91,000 Supplies Used 36,000
Supervision 123,000
Depreciation on pie department equipment 32,000

Divide: Revenue
Gross Margin

3. Assume that next year only 150,000 pies will be manufactured. Find the price needed just to cover total
product costs.

Assume Produce Pies Next Year 150,000

Multiply: Variable Cost Per Unit 1.16

Total Variable Cost 174,000

Add: Fixed Cost
Supervision 123,000
Depreciation on pie department equipment 32,000

Total Product Cost 329,000

Divide: Assume Produce Pies Next Year 150,000
Price Per Unit to Cover Product Cost 2.19
Case 4

1. Prepare an analysis showing which bazaars, if any, Holiday Grammy should pick to attend this year.

Alternative A Alternative B

(a) (c) (a) (c)

Expected Sold Houses 350.00 6.75 2,362.50 400.00 5.95 2,380.00
Cost of Goods Sold
(selling price - $1.25)
5.50 1,925.00 4.70
Gross Profit 437.50
Selling Expense 50.00 30.00
Net Income 387.50 400.00 1.18 470.00

Alternative C Alternative D
Quantity Unit Price Amount Quantity Unit Amount
Price
(a) (b) (c) (a) (b) (c)
Expected Sold Houses 500.00 5.45 2,725.00 600.00 5.00 3,000.00
Cost of Goods Sold
2. If Holiday Grammy could hire someone to handle the next most attractive (profitable bazaar) for her,
what is the maximum amount she could pay and at least breakeven (after her minimum profit per house).

Alternative B
Quantity Unit Price Amount
(a) (b) (c)
Expected Sold Houses 400.00 5.95 2,380.00
Cost of Goods Sold (selling price - $1.25)
4.70 1,880.00
Gross Profit Selling Expenses:
Flat Rate 500.00
Salary
Break Even Point The maximum amount that she 30.00
could pay and at least breakeven is $470.00. 470.00
–
3. If Holiday Grammy could hire other people to
handle additional bazaars and pay them 50% of any profits over $1.25 per house as their wage, to which
bazaar should she commit?

Alternative A Alternative B

(a) (c) (a) (c)

Expected Sold Houses 350.00 6.75 2,362.50 400.00 5.95 2,380.00
Cost of Goods Sold
(selling price - $1.25)
5.50 1,925.00 4.70
Gross Profit 437.50
Selling Expense
Flat Rate
Income 387.50 400.00 1.18 470.00
Selling Expense
Salary
Net Income 193.75 235.00
193.75 235.00

Alternative D

(a) (c)
Expected Sold 600.00 5.00 3,000.00
Houses
Cost of Goods Sold
(selling price - $1.25) 3.75
Gross Profit
Selling Expense
Flat Rate 300.00

Income 450.00
Selling Expense
Salary
Net Income

Holiday Grammy should choose the Alternative B as this is the most profitable among the three remaining
bazaar.

Case 5

1. Walter asks you to prepare an earnings statement that shows the performance of each segment to the firm
by various types of contribution margin.

ILLINOIS TRANSPORTATION

EARNINGS STATEMENT

For the Six (6) Months Ended June 30, 20XX

Freight
Traffic Passenger Traffic Total

Revenue 3,500,000 900,000 450,000 150,000 1,500,000 5,000,000

Variable Costs 2,000,000 670,000 400,000 130,000 1,200,000 3,200,000
Contribution Margin 1,500,000 230,000 50,000 20,000 300,000 1,800,000
CM Ratio 43% 26% 11% 13% 20% 36%

Fixed Costs:
Direct Controllable Cost
Traceable 500,000 30,000 18,000 12,000 60,000 560,000
Not Traceable (allocated) 24,000 12,000 4,000 40,000 40,000
Total 500,000 54,000 30,000 16,000 100,000 600,000

Direct Cost Not Controllable

Traceable 400,000 40,000 20,000 15,000 75,000 475,000
Not Traceable (allocated) 15,000 7,500 2,500 25,000 25,000
Total 400,000 55,000 27,500 17,500 100,000 500,000
Common Fixed Cost 350,000 90,000 45,000 15,000 150,000 500,000
Total Fixed Costs 1,250,000 199,000 102,500 56,500 350,000 1,600,000
Net Operating 250,000 31,000 (52,500) (28,500) (50,000) 200,000
Income
NOI Ratio 7% 3% -12% -19% -3% 4%

2. Comment on what the results tell Walt

Walt’s Bus generate most of its income from Freight traffic with contribution margin of 43% and a net
operating income ratio of 7%. On the other hand, Segment Passenger traffic only had a 20% contribution
margin and a net operating income ratio of negative (-3%). It is shown above that Route 2 and 3 are not
income generating, Walt may consider to close the 2 route and focus more on the segments that generate
income.